Fitch Affirms PA Econ Devel Financing Auth at 'BB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Pennsylvania Economic Development Financing Authority's (the Colver Power Project, or Colver) approximately $169 million in 2005 series F resource recovery revenue refunding bonds (senior bonds) at 'BB+'. The Rating Outlook remains Stable.

KEY RATING DRIVERS

--Contractual Revenues Reliant on Strong Operations: The project relies on the ability of the operator to maintain high availability and capacity factors in order to maximize payments under the power purchase agreement (PPA) with an investment grade utility. The project also benefits from modest excess energy sold at the locational marginal price (LMP).

--Operating Cost Increase: The project benefits from a largely contracted coal supply and has historically maintained compliance with emissions controls. In order to meet the impending Mercury Air Toxics Standard rule in 2015, however, the project will need to utilize additional limestone which may result in a $3 million-$4 million increase in plant operating costs, depending on final compliance methods and requirements.

--Near-Term Debt Service Stable: Under a combined financial stress scenario, Fitch projects near term debt service coverage ratios (DSCR) commensurate with the rating. Beginning in 2015, Fitch projections show pressured DSCRs due to the potential emissions compliance costs and lower dispatch during major maintenance years in 2015 and 2017.

--Debt Structure Supports Cash Flow: The relatively short tenor remaining on the debt combined with substantial liquidity will help to buoy cash flows in the event of a low dispatch year due to maintenance or a substantial increase to operating costs. This benefit is partially offset by the back ended nature of the debt combined with the increasing environmental compliance standards.

RATING SENSITIVITIES

--Emissions control costs to comply with the Mercury and Air Toxics Standards (MATS) substantially exceeding expected levels;
--Increased fuel, ash or plant operating expenses above the current elevated level;
--Any extended outage resulting in decreased availability and reduced cash flow.

SECURITY

The senior bonds are secured by a first-priority interest in all project revenues, a lien on all of the project assets, and security interests in the contract rights of the PPA.

CREDIT UPDATE

Despite 75% of coal under contract, the project has exhibited decreased cash flow due to increased operating costs. The overall cost profile has climbed 13% in 2012 from 2010 due largely to increased cost of diesel with an additional 11% increase budgeted for 2013, partially attributable to an increase in expected generation.

In order to comply with MATS beginning in 2015, the project will utilize additional limestone which is expected to increase costs by $3 million-$4 million. The addition of limestone costs to meet MATS as it stands today would strain cash flow at the current rating level. Fitch notes that there is still some uncertainty regarding the level of incremental costs as alternate methods of compliance are currently being tested to reduce this cost for the project.

Overall 2012 production was lower than previously budgeted due to two unplanned outages that occurred in March and October due to tube leaks. As a result, revenue was lower than budgeted and the capacity factor was 97.8% compared to the near 100% levels that the project has been dispatched at since 2009. This reduced level of output resulted in lower than anticipated operating costs with operating costs of $32.4 million compared to $36.5 million. Overall, the 2012 Fitch calculated DSCR is 1.24 times (x) which represents a significant decrease from the year prior at 1.38x.

The March and October forced outages were due to tube leaks that are common for an aging coal facility. The major maintenance planned for 2014 will likely be pushed to 2015, and should help to improve plant operation though at a reduced output level for the time offline.

The Colver Project consists of a nominal 111.15 megawatt waste coal-fired qualifying facility located on a 62-acre site in Cambria, Pennsylvania. The project also includes a 9.6-mile, 115-kilovolt transmission line interconnecting with the Pennsylvania Electric Company (Penelec; 'BBB-' Stable Outlook) Glory Substation. The Colver facility began commercial operations on May 16, 1995. The senior bonds were issued on behalf of an owner-participant as part of a leveraged-lease transaction. Colver's sponsor is a limited partnership, Inter-Power/AhlCon Partners, which is held by subsidiaries of Constellation Energy Group (Exelon; 'BBB+') and Northern Star Generation.

Under the terms of the PPA, Penelec pays flat rates on annual energy up to 278 gigawatt-hours (GWh) of on-peak production and 501 GWh/year off-peak production. Penelec purchases excess energy, produced in excess of caps above, at the posted hourly LMP or day-ahead of PJM Interconnectedness, LLC. LMP sales, despite their variability in price and small percentage relative to total revenues, help to add cushion to the cash flow profile.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Rating Criteria for Thermal Power Projects', 18 June 2012;
--'Rating Criteria for Infrastructure and Project Finance', 11 July 2012.

Applicable Criteria and Related Research:
Rating Criteria for Thermal Power Projects
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681297
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

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Contacts

Fitch Ratings
Primary Analyst:
Nicole Czarny, +1-212-908-0684
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Yvette Dennis, +1-212-908-0668
Director
or
Committee Chairperson:
Gregory Remec, +1-312-606-2339
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Nicole Czarny, +1-212-908-0684
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Yvette Dennis, +1-212-908-0668
Director
or
Committee Chairperson:
Gregory Remec, +1-312-606-2339
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com